class: center, middle, inverse, title-slide .title[ # Principles of Macroeconomics ] .author[ ### ECO 2307 ] .date[ ### <em>Spring 2023</em> ] --- class: center, middle, inverse # Chapter 11 ## Long-Run Economic Growth: Sources and Policies <img src="data:image/png;base64,#images/qr_codes/QR5.png" width="40%" style="display: block; margin: auto;" /> --- ## Technological Change, Creative Destruction, and Rising Living Standards #### Will other firms like Apple, Facebook, and GM be wiped out in the same way? .pull-left[] .pull-right[] --- ## Economic Growth over Time .panelset[ .panel[.panel-name[Intro] Just as with firms, economic growth is not inevitable for countries History has seen long periods of stagnation where no sustained increases in output per capita occurred Why are there disparities across countries - some countries been able to achieve rapidly increasing real GDP per capita, while other countries have failed to keep pace - Our goal in this chapter is to develop a **model of economic growth** to help answer questions like this ] .panel[.panel-name[Historical Growth] **Early History** (*Bradford DeLong*) - 1,000,000 B.C.E., our ancestors had a GDP per capita of approximately $150 (in 2021 dollars) - world GDP per capita in C.E. 1300 was also about $150 - no sustained economic growth occurred before the Middle Ages - a peasant on a farm in C.E. 1300 was about as well off his ancestors **Industrial Revolution** - Significant economic growth did not really begin until the Industrial Revolution - the application of mechanical power to the production of goods, beginning in England around 1750 - historically, production of most goods had relied on human or animal power - Technological change (mechanical power) spurred long-run economic growth - e.g. England, U.S., France, and Germany - recall from producer theory, technological change (change in productivity) is what drives standard of living changes ] .panel[.panel-name[Worldwide Growth] .pull-left[ <img src="data:image/png;base64,#images/fig_11_1.png" width="100%" style="display: block; margin: auto;" /> ] .pull-right[ <img src="data:image/png;base64,#images/tab_11_1.png" width="100%" style="display: block; margin: auto;" /> ] ] .panel[.panel-name[Implications] Why do growth rates matter? - Living standards (not just iPhones/fancy TVs) - High-income countries: `\(\frac{6}{1,000}\)` babies die before 1 year - Lowest-income countries: `\(\frac{50}{1,000}\)` babies die before 1 year - Poor growth results in countries falling from good outcomes to worse - e.g. Argentina (started as wealthy country but poor growth rate - higher rates of poverty, lower life expectancy, and higher infant mortality Income - Economists use income as classification system - **High-income (industrial) countries**: Western Europe, Australia, Canada, Japan, New Zealand, and the United States - **Low-income (developing) countries**: those not in *high-income* group - **newly industrializing countries**: those who progress out of developing status (e.g. Singapore, South Korea, and Taiwan in the 1980s-1990s) ] .panel[.panel-name[Real GDP per Capita] <img src="data:image/png;base64,#images/fig_11_2.png" width="50%" style="display: block; margin: auto;" /> ] ] --- ## Determinants of Growth Rate .panelset[ .panel[.panel-name[Intro] Is income all that matters? Are economists missing something? - While incomes have not been rising in, for example, sub-Saharan Africa, economist Charles Kenny with the World Bank argues that those countries have made rapid advances in health, education, and civil and political liberties. - But income increases are still essential for low-income countries to close the gap in living standards with high-income countries **Economic growth models** explain growth rates in real GDP per capita over the long run **Labor productivity**: the quantity of goods and services that can be produced by one worker or by one hour of work. ] .panel[.panel-name[Factors] #### Two main factors affect labor productivity: 1. Quantity of capital per hour worked and 2. **Technological change**: positive or negative change in the ability of a firm to produce a given level of output a given quantity of inputs #### Three main factors affecting technological change: 1. Better machinery and equipment (steam engines, machines, computers, etc.) 2. Increases in **human capital**: accumulated knowledge and skills that workers acquire from education and training or from their life experiences 3. Better means of organizing and managing production (e.g. *just-in-time* system) ] .panel[.panel-name[Production Function] .pull-left[ <img src="data:image/png;base64,#images/fig_11_3.png" width="100%" style="display: block; margin: auto;" /> ] .pull-right[ <img src="data:image/png;base64,#images/fig_11_4.png" width="100%" style="display: block; margin: auto;" /> ] ] ] --- ## New Growth Theory and Knowledge Capital .panelset.sideways[ .panel[.panel-name[New Growth Theory] Model of economic growth Robert Solow (1950s) - Does not try to explain technological change - Technological change is exogenous/random Paul Romer (current) - **New growth theory**: long-run growth is due to tech change and tech change is influenced by economic incentives - determined by working of the market system Two types of capital - physical capital - rival and excludable - diminishing returns - knowledge capital - nonrival and nonexcludable - increasing returns (economy level not firm level) ] .panel[.panel-name[Government] #### Government's Role in Knowledge Capital Generation Public goods such as the creation of knowledge capital result in free riding - Free riding: Benefitting from goods and services you do not pay for. - Example: Bell Labs’ development of transistor technology resulted in immense profits for other firms. Because firms do not enjoy the entire benefit of their knowledge capital, they do not produce enough of it. The public good nature of knowledge capital leads to a role for government policy in: - Protecting intellectual property with patents and copyrights - Subsidizing research and development - Subsidizing education ] .panel[.panel-name[IP] **Patents and copyrights** - allow firms to benefit from R&D - increase incentive to get into R&D **Patents: 20 year period** - **patents**: exclusive legal right to produce a product for a period of 20 years from the date the patent application is filed with the government - designed to balance - the chance for a firm to benefit from its invention - the need of society to benefit from it **70 year period** - **Copyrights**: similar to creative works (books and films), - grants the exclusive right to use the creation during and 70 years after the creator’s lifetime ] .panel[.panel-name[Subsidization] **Subsidizing research and development** - Governments might perform research directly—like NASA and the National Institutes of Health—or subsidize researchers at institutions like universities. - Similarly, they can provide tax incentives to firms performing R&D. **Subsidizing education** - In order to perform research and development, workers need to be technically trained. If firms provide this training, they recoup the cost by paying workers lower wages, decreasing the incentive for workers to take such jobs. - A solution to this is to have the government subsidize education, as it does in all high-income countries. ] ] --- ## U.S. Economic Growth .panelset[ .panel[.panel-name[US Growth Rates] .pull-left[ - Growth rates in the United States were relatively modest prior to 1900 - Until the 1970s the U.S. growth rate accelerated due to continuing technological change - Growth was faster between 1950 and 1973 - However, between 1974 and 1995 the U.S. the growth rate of real GDP per hour worked slowed down by over 1% a year below the 1950 to 1973 growth rates. - Beginning in mid-1990s the growth rate picked up again. - Beginning in 2006 the growth rate once again began to decline. ] .pull-right[ <img src="data:image/png;base64,#images/fig_11_5.png" width="100%" style="display: block; margin: auto;" /> ] ] .panel[.panel-name[Growth Debate] **Current debate on whether long period of slow growth:** 1. Optimistic view: productivity is simply more difficult to measure 2. Pessimistic view: productivity growth entered a long-run decline in the mid-1970s that was briefly offset by the revolution in information technology ] .panel[.panel-name[Measurement and IT] Measurement issues - Recent productivity growth rates appear worse due to problems in measuring output - Services - Convenience is not captured in GDP statistics - Example: convenience of ATM vs. bank Role of information technology - Quality of IT and services have been particularly important over the last decade and a half - So, GDP growth has understated the actual growth in living standards - Artificial intelligence (AI) has the potential to have significant impacts on many sectors of the economy and result in increases in productivity - Other economists, such as Robert J. Gordon, disagree and believe the productivity gains from IT largely occurred in the 1990s and future growth will remain below 0.5% or less. ] .panel[.panel-name[Future?] #### Secular Stagnation? Or a Return to Faster Growth? Larry Summers argues growth rates are likely to remain low in coming years: 1. Slowing population growth will reduce the demand for housing 2. Modern I.T. firms require less capital than older firms 3. This price of capital has fallen relative to the price of other goods As a consequence of little need for capital, Summers expects rates of investment to remain low (stagnation). **Critics** - investment has just been low because of the severity of the recession of 2007-2009 - soon return to faster growth **Evidence** - Higher levels of investment started in 2017 and persisted into early 2021 despite the effects of the Covid-19 pandemic - Economic growth in other countries may also increase the demand for U.S. goods and spur growth ] ] --- ## Global Economic Disparities .panelset.sideways[ .panel[.panel-name[Growth Model] .pull-left[ Poor countries should grow faster than rich countries **catch-up**: the prediction that the level of GDP per capita (or income per capita) in poor countries will grow faster than in rich countries Why isn't the whole world rich? ] .pull-right[ <img src="data:image/png;base64,#images/fig_11_6.png" width="100%" style="display: block; margin: auto;" /> ] ] .panel[.panel-name[Catch-Up] <img src="data:image/png;base64,#images/fig_11_7.png" width="100%" style="display: block; margin: auto;" /> ] .panel[.panel-name[Low Income] <img src="data:image/png;base64,#images/fig_11_8.png" width="100%" style="display: block; margin: auto;" /> ] .panel[.panel-name[High Income] <img src="data:image/png;base64,#images/fig_11_9.png" width="100%" style="display: block; margin: auto;" /> ] .panel[.panel-name[Why?] Why are other high-income countries not catching up to the US? - US labor markets are relatively flexible; hiring and firing workers is relatively unrestricted by government regulation. - Similarly, U.S. workers tend to enter the work force sooner and retire later than do workers in Europe. - The US financial system is relatively efficient, and the high volume of trading ensures high **liquidity**, making the U.S. an attractive place to invest. - Small firms find obtaining capital relatively easy in the U.S. due to the advent of venture capital firms. Why are other low-income countries not catching up to the US? - Economists point to four key factors in explaining why many low-income countries are growing so slowly: - Failure to enforce the rule of law - Wars and revolutions - Poor public education and health - Low rates of saving and investment ] .panel[.panel-name[Globalization] Foreign Investment - **Foreign direct investment (FDI)**: A firm’s purchasing or building of a facility in a foreign country. - **Foreign portfolio investment**: The purchase by an individual or a firm of stocks or bonds issued in another country. - Foreign investment can take the place of insufficient domestic investment, whether from private or government sources. Globalization - Great Depression/WWII - Low-income countries hurt by falling exports in the Great Depression and WWII - Cut off foreign trade/investment (isolationalist policies) - 1980s - countries started to reverse these policies - resulted in **globalization**: the process of countries becoming more open to foreign trade and investment - Countries embracing globalization experienced much higher rates of growth than countries that didn’t ] ] --- ## Growth Policies .panelset[ .panel[.panel-name[Anti-corruption] .pull-left[ Property Rights - Establish independent courts and reduce corruption - 1800s US corruption vs. 2022 - Reform efforts were important in setting the stage for growth Savings/Investment - Institutional trust is needed (need to eliminate corruption) - Governments can encourage savings and investment through tax incentives, e.g.: - tax-advantaged savings plans - investment tax credits. **[Corruption Index](https://transparency.org/en/cpi/2022)** ] .pull-right[  ] ] .panel[.panel-name[Health/Education] .pull-left[ - Positive externalities - Health care - Education - Spillovers to other members of country - **Brain drain**: highly educated and successful people leave developing countries to go to high-income countries ] .pull-right[  ] ] .panel[.panel-name[Technological change] .pull-left[ - Often more important than acquiring capital - Driver of standard of living - Low-income countries can encourage technological change by encouraging foreign direct investment ] .pull-right[  ] ] .panel[.panel-name[Discussion] Is economic growth good or bad? - Pro-growth arguments - Anti-growth arguments To what extent can economic analysis contribute to the debate? ] ] ---